Master Limited Partnership Strategy

This strategy invests in Master Limited Partnership (“MLP”) units to generate tax-efficient income and capital growth. MLPs are publicly traded partnership interests that own significant production, distribution and refining assets predominantly in the energy sector. MLPs are required by law to distribute approximately 90% of earnings to unitholders as K-1 income, so these vehicles are predominantly suitable for sophisticated yield-oriented investors. Distribution yields are typically higher than that found in traditional fixed-income instruments, and MLP distributions tend to increase year over year. Like our low-volatility equity strategy, we invest in 15 to 20 MLP positions with a similarly long investment horizon. For certain investors we also buy corporations that hold MLPs and MLP funds. We seek to diversify across industry sectors, natural resource sectors, and geographically within this portfolio.

We consider a diversification matrix, seeking to diversify portfolio risk over multiple dimensions. The MLP universe is small compared to that of common stocks; market capitalizations tend to be smaller than found in the universe of common stocks; and while business plans and resource bases are diverse, MLPs are primarily in the domestic energy production, transportation and refining businesses. Therefore, in building an MLP portfolio we prefer to diversify across several dimensions.

First, we seek multiple natural resource categories (petroleum, natural gas, coal, shipping and propane). We seek diversification along the natural resource value chain, with a mix of businesses involved upstream (exploration and production), midstream (transportation and distribution), and downstream (refining and processing). Our focus is on the very stable midstream and downstream business platforms largely removed from commodity price risk.

Second, we seek to diversify by geographic profile. A considerable portion of the energy infrastructure of the United States is concentrated in the hurricane-prone Gulf of Mexico states. A significant storm could lead to business disruptions for operators in that region. While we do not avoid that region, we seek broad geographic diversification by MLP issuer and through portfolio construction.

Third, we seek a variety of market capitalization MLPs in the portfolio. While we have no hard limit, most of the positions are in excess of $1 billion in market cap, with the largest in excess of $20 billion. Our bias to mid- and large-capitalization issuers helps to assure that we are choosing proven business platforms with solid access to capital to support distribution growth over time, and with sufficient liquidity for ease of trading.